Private equity slips out of Harman deal


Two private equity firms, Kohlberg Kravis Roberts and Company (KKR) and GS Capital Partners (an affiliate of Goldman Sachs), have been let out of their broken eight billion bucks deal to take Harman International private (9/24/07 RBR #186) without having to pay the 225 million termination fee spelled out in the original contract. They will, however, buy 400 million worth of Harman convertible senior notes paying 1.25%. The settlement announced yesterday avoids a court battle over one of the biggest private equity buyouts to be abandoned in the current credit crunch.

"We are pleased to have reached an understanding with KKR and GSCP. Although we do not agree with the reasons for cancellation of the original merger agreement, we view this 400 million investment as a vote of confidence in our business and its prospects for continued growth," said Sidney Harman, Executive Chairman of Harman. The company plans to use the 400 million to accelerate its stock buyback program.

In addition to buying the notes, which cannot be sold or hedged for at least a year, a KKR representative, Brian Carroll, will take a seat on the Harman board of directors.

RBR/TVBR observation: Bravo! A pretty clever settlement. Harman shareholders would obviously have preferred the 120 bucks in cash that they were supposed to receive for each share, but the deal now to let KKR and GS Capital Partners walk away will pump cash into the company without a drawn out court battle. The trigger price on the conversion, by the way, is 104 bucks per share, which is quite a distance from the mid-80s where Harman has been trading since the buyout collapsed. So, it appears that Harman will get to use that cash on terms well below market rates for some time to come. Some traders still have jitters that some private equity buyouts in media could suffer the same fate, but we still haven’t heard of any actually being on shaky financial ground.